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Using CDS Hazard Rates to Inform Bond Pricing

Article Quant Q&A · Author: Pithit
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Summary

The document asks whether default probabilities implied by credit default swap (CDS) spreads can be used to price bonds from the same issuer. The responses say that implied default intensities can inform bond valuation when a CDS quote exists for the issuer, or for a comparable issuer, though relying on a proxy issuer is described as less suitable. They also point to the credit triangle, which relates hazard rate, credit spread, and recovery rate and can help translate CDS spreads into default risk assumptions.

A repo in the bond itself is mentioned as another way to approach the pricing question, with the response characterizing the repo structure as shifting counterparty risk to the repo provider. The discussion offers references rather than a worked valuation, calibration procedure, or empirical comparison. It does not specify how to handle differences between CDS and bond terms, liquidity, recovery assumptions, or market conventions, so the suggested relationships are a starting point rather than a complete bond pricing framework.

Key ideas

  • CDS implied default intensities can be used as inputs when pricing bonds from the same issuer.
  • A CDS quote from a comparable issuer may serve as a proxy, but the response cautions that this is less suitable.
  • The credit triangle links hazard rate, CDS spread, and recovery rate.
  • A repo in the bond is presented as an alternative pricing reference with counterparty risk borne by the repo provider.
  • The discussion provides references but no complete bond valuation method or treatment of market-specific adjustments.

Tags

Fixed incomeDerivatives pricingRisk management
Full text
# CDS, default probability and bond price


# CDS, default probability and bond price












When we calculate the implied default probabilities from CDS, can we use that information to price bonds?

I am getting familiar with Fixed Income. I saw textbooks using implied default probabilities in CVA and credit derivatives context, but I wonder if it can be used to adjust the price of bonds (for that issuer).

Any paper/textbook/etc would be highly appreciated.

## Answer by Xman (score 1)

https://quant.stackexchange.com/a/45953

Yes you can use implied default intensities to price Bonds if you have a quoted CDS for the issuer of the Bond or for an issuer with roughly the same characteristics even tough that's not the best thing to do. You can also avoid the whole CDS dilema with a repo on the security itself, and in this case counterparty risk is fully taken by the repoer...

@Edit: Here is a good paper "https://studenttheses.cbs.dk/bitstream/handle/10417/3636/marko_celic.pdf?sequence=1" you can check page 37... And for the replication of CDS with a repo here's what I found after a quick search even though it's not explicitly done for the purpose of Bond pricing in this paper https://arxiv.org/pdf/1305.0040.pdf

## Answer by Vitomir (score 0)

https://quant.stackexchange.com/a/45945

You can look for credit triangle. It establishes a relation between hazard rate, spread and recovery rate.

Look at this: How to compute the implied probability of default from a CDS spread?

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.